Commentary:  mortgage interest rates are drifting lower for the third straight day – driven primarily by swirling uncertainly surrounding the continuing sovereign debt saga in Europe.

A great deal of the work done last week during a summit of European financial leaders to reach an accord to prevent a near-term financial collapse of Greece may have all been for nothing.

Greek Prime Minister Papandreou threw the European Union a nasty curve yesterday evening when he called for a public referendum on the bailout package the Greek government accepted just last week.  In essence, the Greek people are going to be asked if they want to be saved or not.  The public vote is not expected until January.  If the Greeks vote against the rescue package, it will almost certainly result in a disorderly default of the country’s debt, a collapse of their major banks and dramatically increases the likelihood that the contagion will quickly spread to other euro-zone countries.

Depositors had been gradually taking their money out of Greek banks but now – faced with the possibility of a No vote – the exit from the euro currency and euro-zone banks-at-large will accelerate.   The ensuing “flight-to-quality” is virtually certain to contribute support to the prospects for steady to perhaps fractionally lower mortgage interest rates here in the states.

The Federal Open Market Committee gathered this morning for the first of two-days of monetary policy discussion.  With fears receding a new U.S. recession is imminent the Fed will likely make no change to the current level of their benchmark short-term interest rates.  There are some who believe the Fed may offer hints on how close it is to expanding asset purchases – perhaps even returning as a major buyer of mortgage-backed securities in an effort to spur economic growth.  I suspect the Fed will not discount such a move completely – but will make it clear that further stimulus is not likely to be forthcoming for the balance of the year – a mortgage interest rate neutral event.

Authors: Fred Arnold

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